Water and wastewater

OUR PERFORMANCE AGAINST THE K6 REGULATORY CONTRACT (2015-2020)

South West Water has the highest potential rewards in the sector for K6. At 31 March 2016 the combined water business (South West Water and Bournemouth Water) has delivered an 11.7% Return on Regulated Equity (RoRE)(1) arising from base, operational and financing returns.

TOTEX STRATEGY - SECURING OUTPERFORMANCE

South West Water is striving for ever greater efficiency in K6, building on a strong track record from K5. The company was deemed to be at the frontier of cost efficiency when it was awarded an enhanced Business Plan assessment with the largest element of potential operational outperformance over K6 coming from total expenditure (Totex) savings and efficiencies. Bournemouth Water is one of the top performing water-only companies and was deemed to be mid-table for efficiency. The combined water business is 'front-end-loading' ef ciencies and savings to allow early and more certain delivery of outperformance. £56m of Totex savings(3) have been delivered in 2015/16, despite costs of delivering growth. These Totex savings re ect changes in the timing of delivery from those planned in the determinations.

RoRE reflects the Ofwat regulatory guidance of Base RoRE plus Outperformance. It is calculated using actual results before non-underlying items (deflated into 2012/13 prices) and compared against the Final Determination allowances sourced from Ofwat published models and based on notional gearing and annual average regulatory capital vehicle (RCV).

£53m from South West Water, £3m from Bournemouth Water including integration synergies already delivered. Phasing of actual expenditure compared to the planned programme has been reflected. Outperformance includes a reduction in the RCV run-off for the RCV element of Totex outperformance calculated based on the Final Determination PAYG. Tax impacts reflect actual effective tax rates.